Fiscal Policy as an Instrument of Investment and Growth

19 Pages Posted: 20 Apr 2016

See all articles by Kaushik Basu

Kaushik Basu

Cornell University - Department of Economics; IZA Institute of Labor Economics; Brookings Institution

Date Written: May 1, 2014

Abstract

This paper investigates the role of fiscal guarantees in promoting infrastructure investment. Infrastructure is a critical driver of economic growth, but infrastructure entails significant up-front costs that yield benefits after a time lag. Investors hesitate to put their money down on private infrastructure ventures because of the long lag and governments do not give guarantees for reasons of fiscal prudence. The paper argues that governments and large investment guarantee agencies can in many situations give suitably-calibrated guarantees to private projects by exploiting the fact that a guarantee on one project can reduce the risk of another one failing. The paper works out the architecture of such guarantees, which can be fiscally prudent and yet boost investment, especially in infrastructure, and thereby promote growth.

Keywords: Debt Markets, Access to Finance, Emerging Markets, Bankruptcy and Resolution of Financial Distress, Non Bank Financial Institutions

Suggested Citation

Basu, Kaushik, Fiscal Policy as an Instrument of Investment and Growth (May 1, 2014). World Bank Policy Research Working Paper No. 6850. Available at SSRN: https://ssrn.com/abstract=2431988

Kaushik Basu (Contact Author)

Cornell University - Department of Economics ( email )

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IZA Institute of Labor Economics

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Brookings Institution ( email )

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